Economist Stephen Roach Discusses the Current State of the Global Economy
Stephen Roach's prognosis for the U.S. economy is not exactly rosy. As he told the Yale SOM Finance Club on October 12, many factors appear to be combining to keep the economy from recovering three years after the financial crisis. Roach has long been one of Wall Street's most influential economists. He has spent 29 years in senior positions at Morgan Stanley—the bulk of that time as chief economist and more recently as chairman of the firm's Asian businesses. He is currently a senior fellow at the Jackson Institute for Global Affairs and a senior lecturer at Yale SOM.
Roach cited public and private indebtedness, the paltry savings of individuals, lax consumer demand, and the inability of traditional sources of growth to drive a recovery for what he described as an economy "on the brink of a Japanese-style lost decade or two."
For years, he said, policymakers and business leaders have focused on pushing for "false prosperity"—economic growth built not on strong fundamentals but high consumption, low interest rates, and a relentless focus on asset markets and financial innovation. As a result, the fallout from the financial crisis continues to hamper a recovery, especially as individuals have yet to completely deleverage their balance sheets. The situation remains so bad particularly among consumers—the prime drivers of U.S. GDP-that Roach refers to the group as the "walking economic dead" and "America's zombie consumers." Growth over the last 14 quarters has averaged only 0.2%. "If that's not zombie-ism, I don't know what is," said Roach.
He added: "When you look at the process of balance-sheet deleveraging, the process has just begun. I remain very cautious about the prospects for the global economy over the next few years."
Roach told the audience that he doesn't see any of the prescriptions from either political party having a significant impact on the situation. The challenge, he said, is to find a way to stimulate consumer demand during a period of high debt and low demand. Until there are policies that directly deal with the two issues, consumer demand will continue to stagnate.
Prospects are made even cloudier by the sovereign debt crisis currently paralyzing Europe. Roach counts this as the 11th fiscal crisis in the world in the last three decades—a period during which those events appear to be coming with greater frequency. Europe, according to Roach, will not be able to truly recover from the last two crises until it addresses its "flawed currency union." He sees two choices for the Euro Zone: consolidate into a true fiscal union, or break up. "And it's critical that European authorities move quickly and aggressively to make certain the crisis doesn't spread to larger economies such as Italy and Spain," he said. "What we've seen so far isn't encouraging. They've put forth a plan with no specificity and said, 'Trust us.' I wish we could."
As the world's two largest economies, the fates of the United States and Europe have an outsized impact on the rest of the globe. As long as consumers in the U.S., Europe, and Japan continue to hold back, it will impede growth in export-led developing economies such as China and India. But while others have turned bearish, particularly toward China, Roach remains optimistic. He believes the country's leadership will be able to transition the economy away from relying on exports and investment to one with more internal consumption. Such a move would allow China to continue its upward trajectory and better weather global slowdowns. "You can go on YouTube and watch videos of Chinese ghost cities, which some say is a sign of a coming crash," he said. "But those will be teeming metropolises sometimes in the next five to ten years."